Leading Negotiations

Ben Fiorentino had long been expecting an offer to buy his family’s business. FHE (originally Fiorentino Heavy Equipment), founded by Ben’s father, Tony, was an Indianapolis-based regional distributor of industrial equipment. With annual sales of $220 mil- lion and just under three hundred employees, FHE had thrived under family management for nearly forty years. After his father’s death fifteen years earlier, Ben had taken the reins as chairman and CEO, leading the company through a period of sustained growth. But Ben could feel the winds of change in his industry. Larger companies were buying and consolidating regional distributorships like his to gain advantages of scale—the classic rollup strategy. It had become clear to Ben that FHE could not survive long term as an independent business. He could stave off competition for a while, but it was just a matter of time. When Ben was approached by Argus Corporation, a leader in the trend toward consolidation, it was almost a welcome devel- opment. Argus already owned a similar distributorship in an adja- cent region (and sometimes competed with FHE at the intersection of the two regions), so FHE was a natural fit for them. Although pained, Ben concluded that it would be best to sell—and relatively soon, while he could still get a good price. His father had wanted, above all, financial security for the family. Tony 189 190 BREAKTHROUGH BUSINESS NEGOTIATION had always seen the business as a way to achieve that, not an end in itself. Properly invested and overseen, the proceeds of the sale could sustain the family for the foreseeable future, and probably less divisively than the business had. As the family had grown and the third generation had joined the company, conflict had in- creased (though it was scrupulously confined to biannual family meetings and never aired in public). Ben was also ready to move on himself. In his early fifties, he was prepared to spend a few more years running the business but wanted to pursue other interests. Getting the family to agree to sell would be an uphill battle. Ben’s two siblings were emotionally attached to the business and to its employees. His sister, Leslie, had never been active in the company, and she and Ben were close. But her husband had been CFO until his sudden death three years earlier, and he had been strongly invested in its success. Two of Leslie’s three children also worked for the company, and the oldest planned on a career there. (Ben’s own two children had gone into other professions.) Potentially more problematic was Ben’s brother, James, who held a midlevel position in the company. James had no higher as- pirations, but his older son worked at FHE and aspired to run it. James’s position in the business had anchored him through a tur- bulent personal life, and a decision to sell would represent a pro- found change for him. Ben and James rarely saw eye to eye on business issues, politics, or anything else. Legally, Ben needed the support of either Leslie or James, not both, to sell the business. But a decision based on anything less than consensus would be wrenching. Then there was the related question of whether and how to involve the third generation in the decision. As part of an estate planning initiative, FHE had created two classes of stock. The nonvoting stock, which represented 70 percent of the economic value of the business, had been split evenly among the members of the third generation. Ben, Leslie, and James had retained all the voting stock, evenly apportioned among them. This arrangement gave them control, but their shares represented just 30 percent of the economic value of the company. The seven members of the third generation, all in their late teens and twenties, thus had no clear-cut legal right to participate in the decision-making process, but they would have an influence. Three were active in the business and had expressed varying de- grees of interest in running in it. The other four showed no in- terest in the company other than receiving dividends. Ben believed that they would be happy to see the business sold, since their fi- nancial futures would be secured and the increasingly divisive fam- ily meetings would end. Finally, there was the question of the role that FHE’s profes- sional managers should play. After the death of Leslie’s husband, Ben had hired an experienced outside manager as CFO. Vice pres- idents of sales, operations, and human resources also reported to him. All earned competitive salaries and participated in the profit- sharing plan Ben’s father had established twenty years earlier. Even if he could elicit buy-in from the family to negotiate a sale—which was not a foregone conclusion—it was unclear to Ben how to go about managing the process. He had no prior experi- ence with mergers and acquisitions, nor did anyone else at the company. Who should participate in the negotiations? What ex- ternal advice, if any, should he solicit? How should the process be run? What role should he play? This chapter will explore leadership in negotiation, looking in particular at how negotiators lead when they represent others and when they orchestrate teams. REPRESENTING OTHERS When a negotiator represents the interests of others, those who are absent from the table could be principals with decision-making power (such as the CEO of a company being represented by a business-development executive) or constituencies who expect LEADING NEGOTIATIONS 191 192 BREAKTHROUGH BUSINESS NEGOTIATION the representative to lead them (such as the members of a union bargaining unit being represented by their elected leader). 1 The internal interests being represented may be monolithic or frac- tious. And the representative may function as a pure agent or pur- sue personal interests in tandem with others’ interests. Whatever the scenario is, the representative functions as a bridge between internal decision making and external negotia- tions. 2 When negotiators participate in shaping their mandates, have an unwavering vision of what they want to achieve, and work to shape perceptions internally and externally, they maximize their ability to advance their side’s interests—and their own. Representational Roles and Dilemmas Negotiators who represent others enjoy considerable leeway in how they exercise leadership. 3 To be effective, though, representatives have to understand the roles available to them and shape the roles they play. 4 This is largely a matter of confronting and managing several characteristic dilemmas that test their leadership. Representing Others Versus Representing Oneself. Represen- tatives may or may not have their own legitimate interests in the outcome of a negotiation. At one extreme, as illustrated in the fig- ure on page 193, a representative is a mere agent of others with no independent interests; at the other extreme, the representative is the principal decision maker, someone who has the legitimate authority to participate in making decisions. In between, a rep- resentative operates as a partner of other decision makers who are not at the table, representing both their interests and his or her own. This is the role that Ben would play in a negotiation with Argus. He has decision-making authority as well as his own in- terests, which may not be perfectly aligned with those of his sib- lings or the company’s professional managers. Operating in the middle of this spectrum, Ben is certain to confront a principal-agent problem: his interests and the interests of those he represents are not perfectly aligned. 5 His ability to con- trol the flow of information and shape perceptions could allow him to create and claim value in ways that serve his personal interests and not those of other constituencies. This enviable position may generate distrust on their part. The more he tries to create value at the table by identifying creative trades, for example, the greater the likelihood of generating suspicion in his constituents that he is doing so to further his own interests. Given the long-standing tension between Ben and his brother, James, and the potentially incompatible interests of the third generation, Ben must prepare to confront this dilemma. It is likely, for example, that a deal with Argus will provide for Ben to stay with the company for a couple of years to ensure con- tinuity. He has a personal interest in maximizing his salary and performance-based bonus, but must avoid the appearance of giv- ing Argus too favorable a deal in return for a good package. Representing Stated Interests Versus Best Interests. At one ex- treme, as shown in the accompanying figure, a representative acts as a mere agent, seeking only to gain a mandate and to understand his principals’ stated interests and instructions. He acts on these instructions and conveys at-the-table offers to the principals for ratification or revision. At the other extreme, the representative acts as a visionary leader, profoundly shaping his constituents’ perceptions of their best interests in response to external realities. Between these two LEADING NEGOTIATIONS 193 Representing Others Versus Representing Oneself Representing others’ interests Agent Partner Principal Representing own interests poles, the representative functions as an educator to help the prin- cipals understand what their best interests are. Because Ben must convince his family and the professional managers that selling the business is in their best interests, this is the role that he must play in any negotiation with Argus. Representatives in a position to shape their constituents’ per- ceptions of their interests encounter another dilemma. If Argus viewed Ben as unable to budge his constituents, he could plausi- bly portray their positions as rigid and could use the need to sat- isfy them as a tool for claiming value. But it would be hard for him to create value because he wouldn’t be able to demonstrate flexi- bility in exploring options without damaging his credibility. Conversely, if Argus viewed Ben as highly influential with his constituents, he would come under increasing pressure from Argus to influence them. He would be in a stronger position to create value, but less able to claim value by using ratification tactics. To the extent that Ben is seen by the family and FHE’s man- agers as having a personal interest in the outcome of the negoti- ation, his ability to influence their perceptions will suffer. If his constituents don’t trust him to act in their best interests, they are likely to resist his efforts to educate them about external realities. Representing Unified Interests Versus Incompatible Interests. When internal interests are unified, a representative can simply act as a straightforward agent of those interests. If internal interests 194 BREAKTHROUGH BUSINESS NEGOTIATION Representing stated interests Agent Educator Visionary Representing best interests Representing Stated Interests Versus Best Interests are fractious, as the accompanying figure illustrates, the repre- sentative has to act as a coalition builder, allying with some sub- set of people inside. Between the two extremes, the representative acts as an internal mediator in an effort to craft consensus po- sitions. Ben will initially act as a mediator in an effort to gain support for selling the business. He will try to integrate the interests of all family members, develop creative options, and craft a consensus position on sale of the business. But what if some members of the family implacably oppose a sale? What does he do then? One op- tion is to drop the plan to sell. But Ben believes that this outcome is not in the best interests of the family. It would also hold every- one hostage to the veto of the most opposed family member. Ben might have to shift to building a coalition that alienates some members of the family. It is essential that Ben establish workable decision rules gov- erning how the family will reach closure on a decision to sell. This means drafting a set of rules that is perceived as fair and getting the family to agree to them. Because the decision rules are likely to have a decisive impact on the ultimate outcome, Ben must craft them with care and expect vigorous debate. The battle may be lost or won here. He should therefore (1) use arguments about fairness to shape family members’ perceptions of their interests, (2) raise the cost of disagreement by building a coalition in support of ex- ploring options, and (3) isolate the opponents. LEADING NEGOTIATIONS 195 Representing Unified Interests Versus Incompatible Interests Representing unified interests Agent Mediator Coalition builder Representing incompatible interests Ben’s efforts to build internal consensus could constrict his flex- ibility in external negotiations: the terms on which the family reaches consensus may be too extreme for the other side. For this reason, it might be best for Ben to postpone trying to build inter- nal consensus. The risk of postponement, however, is vulnerabil- ity to being divided and conquered. Ben will have more flexibility in his negotiations with Argus if he doesn’t push for early consen- sus, but he will face more internal disagreement when he brings the family a proposed deal. Conversely, if he pushes for early consen- sus within the family, he will enjoy less flexibility in external bar- gaining but will have an easier job ratifying a proposed agreement. This dilemma is most acute when a representative attempts to function as a mediator. If Ben has to reconcile diverse internal interests, he may want to maximize his internal flexibility by un- dertaking exploratory talks with Argus and developing an attrac- tive package before pressing for internal consensus. But he will risk looking unprepared or weak in external negotiations. Ben may de- cide instead to abandon hope of an internal consensus and work at building a partisan coalition in the family to maximize his ex- ternal flexibility. The Representational Role Grid. The three dimensions along which representational roles vary can be combined and depicted in the three-dimensional grid on page 197. All three dimensions are anchored by the role they share: that of agent. The situation con- fronting representatives can be diagnosed by first identifying where they lie on the three axes and then assessing the corresponding challenges. Because of his role in the family, Ben will have to op- erate close to the middle of the representational role grid. He will act as a partner, representing his own interests as well as others’. He will have to educate his constituents about their best interests. And he will function, at least initially, as an internal mediator. Shifting Among Roles. As the negotiation proceeds, Ben may de- cide to shift roles. If he concludes that consensus is impossible and 196 BREAKTHROUGH BUSINESS NEGOTIATION that less-than-unanimous agreement is more desirable than no deal, he might stop acting as an internal mediator and become a coalition builder. He must be careful, however: shifts among roles are not always reversible. Once he has sided with a particular coali- tion in the family, it will be impossible for him to revert to being a neutral mediator. With a better understanding of the representational challenges Ben faces, take a couple of minutes to think about what you would do in his situation. What would your goals be, and what actions would you take, in what order, to achieve them? LEADING NEGOTIATIONS 197 Agent Champion Coalition builder Mediator Visionary Partner Principal Representing others Representing self Stated interests "Best" interests Unified interests Incompatible interests Representational Role Grid
Building Momentum Ben’s ultimate goal is to sell the business at a good price. To build momentum toward that goal, he should structure the process in three phases: securing a mandate from the family, getting the pro- fessional managers on board, and then structuring and leading the team in negotiations with Argus (and possibly others). Securing a Mandate. In the first phase, Ben’s objective is to se- cure a mandate to explore sale of the company, without anyone having to commit to do so. It will be hard for opponents of a sale within the family to argue against simply exploring options. Once exploration is under way, it is likely to create its own momentum; this is a splendid example of entanglement. Ben should begin to educate his family about the risks of not selling the business and make the case for doing so at the right price. Above all, he wants to discourage early formation of a block- ing coalition. Such a coalition could consist of James, James’s son, and one or more of Leslie’s children. But because there is no sign of implacable opposition at this point, Ben should avoid actions that will generate reactive coalition building. Ben should use a mix of shuttles and summits to build mo- mentum. He should probably begin with one-on-one discussions, first with Leslie and then with James, followed by a three-way meeting. Then he should organize a full-family meeting to solicit approval to explore a sale. Before meeting with Leslie and James, Ben should think about how to frame the argument for each. Leslie will probably trust Ben’s assessment of the business realities, but she may feel emo- tionally resistant to selling her father’s company. Ben should stress that, above all, their father wanted financial security for his fam- ily and that it is their financial security that is at risk; he could re- mind her of specific remarks their father made. She will also be concerned about her son’s future. Ben should stress that a sale would have to include a transitional arrangement for family mem- bers to continue to work in the business for a year or more. 198 BREAKTHROUGH BUSINESS NEGOTIATION Ben should use similar arguments with James. But he should stress the need for outside assessments of the future of the business in order to blunt possible suspicion that Ben simply wants to get out. He should also spell out the financial benefits of a sale at the right price. Assuming that the business could be sold for a price of roughly 1 x annual sales, it would net roughly $200 million. Since the company has negligible debt, this price would translate into $20 million each for James and his children. Meeting individually with every member of the third genera- tion would take too much time and might create the appearance that Ben is playing politics. Instead, he should ask his siblings to discuss the issues with their children. (They would do so anyway.) He should then convene a family summit meeting as soon as is practical (leaving no time for misperceptions to build up or coali- tions to form). Meanwhile, he should talk with his own children to be sure they are on board. If his children are friendly with cous- ins who don’t work in the business (and who thus might be more likely to support sale), he could encourage his children to sound them out; they should wait a few days to do so, to give Ben’s sib- lings time to talk with their children first and to avoid the per- ception that Ben is coalition building. This will help Ben get a sense of where things stand. Ben’s goals for the family summit meeting are to (1) present a clear picture of the business’s current situation and details of Argus’s overture, (2) lay out the potential costs and benefits of a sale, (3) get buy-in for hiring advisers and exploring possibilities, and (4) agree on decision rules for the ultimate decision. The is- sues should be dealt with in this order. Ben should stress that none of these steps commits them to sell the business, but that they need clarity about what their options are. The crucial step, as we have seen, is to secure agreement on the decision rules. Ben could accomplish this by framing the first key decision—whether to hire professional advisers to help the family value the business and to advise them on dealing with Argus—and using that decision to engineer agreement on a LEADING NEGOTIATIONS 199 decision process. Specifically, he should propose a decision rule of sufficient consensus, not unanimity. Otherwise, the most opposed individuals can veto sale of the company. Sufficient consensus could consist of a two-thirds majority of the family, including both the second and third generations. Because each individual effec- tively owns 10 percent of the company’s value, he can argue that this is a fair way to pro